Question

For many years, Lehigh Corporation has used a straightforward cost-plus pricing system, marking its goods up approximately 25 percent of total cost. The company has been profitable; however, it has recently lost considerable business to foreign competitors that have become very aggressive in the marketplace. These firms appear to be using target costing. An example of Lehigh’s problem is typified by item DC66, which has the following unit-cost characteristics:
Direct material....................................................................... $ 90
Direct labor............................................................................ 225
Manufacturing overhead....................................................... 150
Selling and administrative expenses..................................... 75
The going market price for an identical product of comparable quality is $585, which is significantly below what Lehigh is charging.

Required:
1. Contrast cost-plus pricing and target costing. Which of the two approaches could be aptly labeled price-led costing? Why?
2. What is Lehigh’s current selling price of item DC66?
3. If Lehigh used target costing for item DC66, by how much must costs change if the company desires to meet the market price and maintain its current rate of profit on sales?
4. Would the identification of value-added and non-value-added costs assist Lehigh in this situation? Briefly explain.
5. Suppose that by previous cost-cutting drives, costs had already been “pared to the bone” on item DC66. What might Lehigh be forced to do with its markup on cost to remain competitive? By how much must the markup change?
6. Early in this chapter, the text noted that in many industries, prices are the result of an interaction between market forces and costs. Explain what is meant by this statement.
7. Construct an Excel spreadsheet to solve requirements (2) and (3) above.
Show how the solution will change if the following information changes: the direct material and direct labor per unit are $85 and $220, respectively.



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  • CreatedApril 22, 2014
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